RadiSys Corporation (RSYS): Racing Toward A Radical Drop

All the good news has already been priced into RadiSys Corporation (NASDAQ: RSYS), creating a perfect jumping off point.

Now RadiSys looks poised for a radical hit.

The Hillsboro, Oregon-based computer server company has turned in consistent net losses for years. But the stock went ballistic recently when the company named Verizon as the customer that earlier placed a DCEngine trial order. RadiSys had hinted at the identity at least four months before. But the June 7 announcement kicked the stock out of sight.

The chart shows that the company's legacy business "Embedded Products" has been enduring 24% to 20% margins for 1 1/2 years. And last quarter's margins dropped all the way down to 15%.

*3. Paltry Help: New Kid, DCEngine

What about that DCEngine announcement that made the stock go crazy? Couldn't that revenue fill the low sales/low margin gap?

Problems pop up here, too.

*RadiSys is tiny, tiny. The space is dominated by chest-beating gorillas Hewlett Packard, Dell and many, many robust server designer/manufacturers based in Asia.

*The segment's gross margin is very small ...15%.

*Lumpy orders and typically little-to-no sales guidance is provided by customers like Verizon. Orders come in and then nothing happens for several quarters or more. So it is difficult to get a really good sales trend estimate.

RadiSys investors, in our view, are not getting the value they deserve. And they're paying too much for the stock.

As shown by the downward positioned bars below, the company is destroying shareholder value faster and faster.

(Source: Bloomberg, arrow author adaptation)

After the chief financial officer was promoted to chief executive in late 2012, retained losses rocketed ... from $179 million to $271 million.

In an attempt to fill the hole created by bigger earnings losses, the company seems to be happy diluting shares of stock.

(Source: Bloomberg)

Issues with stock value may have contributed to a big blowup shortly before the June 8 shareholder meeting .... over executive compensation....

*5. Big Fight: Excessive Executive Compensation

Executive compensation blew up into a controversy so big that a group called "Institutional Shareholder Services" formally opposed re-electing Vincent Tobkin to the board (here). He had chaired the compensation committee that hammered out a compensation package as the company delivered what it called "significant shareholder returns."

RadiSys disagreed with the ISS group's contention that the company "had not been engaged with its shareholders and has failed to identify the issues that led to the strong opposition." Mr. Tobkin was re-elected.

Here's a look at RadiSys net losses. Losses have improved slightly over the last year or so but are still terrible.

"Money has no grey areas. You either make it or you lose it," said Shark Tank's Kevin O'Leary.

RadiSys is losing it.

TheStreetSweeper doesn't believe this hopes and dreams company - plagued by fierce competition, horrid margins, misplaced expectations, rising losses and irritated shareholders - can magically turn around its losses of $-0.29 per share.

We think radically overpriced RadiSys is racing toward a radical drop of 35% to 50%.

* Important Disclosure: The owners of TheStreetSweeper hold a short position in RSYS and stand to profit on any future declines in the stock price.

* Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to scolberg@thestreetsweeper.org.